Much of the commentariat’s reporting of the most recent GDP figure was misleading and unhelpful.
The prize for the stupidest remark about the GDP figure for second quarter 2020 (2020Q2) released on Thursday (17 Sept) goes to Judith Collins, whose response to Grant Robertson’s comments indicated she did not understand the distinction between wellbeing and material production.
Economists have been making this point since measures of material output were systematised ninety years ago, and non-economists for about the last third of that time. Possibly it is too soon to expect all politicians to get their heads around the issue. Woe to us if they ever came in charge of the economy. (I have not seen Paul Goldsmith show the same ignorance.)
The fact is that wellbeing took a beating in 2020Q2. The impact of the Covid virus made us worse off – it killed some of us, and it would appear that some of those who survive a bout of it may suffer lifetime limitations. . (We wont know how much for some years.)
Faced with the increasing threat the Government chose policies which would reduce the spread of Covid but had the tradeoff of reducing material production. (Note I have used ‘government’ with a capital ‘G’, but no adjective such as ‘Ardern-Peters’; an English-led or Bridges-led Government would have done much the same.)
Whether it got the balance exactly right, we cannot yet tell. Certainly among OECD countries our 25 deaths are impressively low (and we could have done even better had we realised the risks in residential homes). On a comparable per capita basis with the whole of Australia we would have had 165 deaths; more if you compare with most other OECD countries.
So the policy tradeoff saved at least 140 lives (plus reduced health damage to survivors) for a three percent cut in annual GDP (perhaps a bit more in that there will not be an immediate full recovery). You are welcome to judge whether that was a good decision – but at least you are going to be around to discuss it with your grandchildren. And you will talk, I expect about the total story although you may well play down the material loss (recall your granparents talking about the Second World War).
(As a minor point private consumption did not fall as much as production. That is especially true if effective private consumption where work-related spending – such as for commuting – is deducted. So the short-term personal material loss was smaller than the GDP figures suggest.)
Second prize for economic ignorance goes to the journalist consensus that ‘officially the economy is in recession’. There is no ‘official’ definition of recession in New Zealand (check out the Statistics New Zealand website).
It is true that there is a ‘technical’ definition, which if mechanically applied meant New Zealand was in a recession in 2020Q2. It comes from the US. I am not sure it usefully applies to New Zealand. Our business cycles differ from theirs in important ways; slavish imitation is not only lazy but deeply misleading.
Indeed, in my opinion the term ‘recession’ itself is unhelpful, insofar as it is normally used for a phase in the business cycle. It is not all obvious that we should use standard business cycle analysis to describe what is going on. New Zealand has experienced a substantial supply-side shock – a 12.2 percent contraction in a quarter is much bigger than any past occasion I can think of. To announce in three months time, as journalists will, that New Zealand has had the ‘biggest (official) recession recovery ever’ in the September ending quarter (2020Q3) is playing with words.
We need to think much more carefully about what is going on. My expectation is that careful analysis will identify at least two ‘shocks’. The first is from the closure of borders which flattened the international tourism and education industries; the second is from the lockdown(s) to eliminate community transmission. A third significant effect may be the world economy has slowed down. See what I mean about the oversimplification of the attention grabbing (and inaccurate) headline of ‘New Zealand is officially in recession’?
Statistics New Zealand added a comparison for a number of other countries. It probably did so to check that the very large number was not unreasonable. (There are other checks/statistics which also suggest it is about right, which is why professional economists were not surprised by the SNZ figure.) Exact comparisons are not entirely helpful because all the figures will be revised as new data becomes available, sometimes by larger margins than the apparent differences. Moreover the timing in the various countries differs – some were still in severe lockdown after June (some are returning to more severe ones).
For what they are worth, the international comparisons suggest that most OECD countries experience a contraction of similar magnitude in 2020Q2 – around 10 percent. There were 12 OECD countries with greater contractions of production than New Zealand, and the poor devils have much higher COVID death rates too.
Notes about the 2020 Second Quarter GDP Figure